Jon Hanifan, Business Development Director, Centralis Group
For alternative fund managers, the path from starting up to scaling up involves navigating a complex landscape of regulation, tax and operational considerations. Each stage has distinct aspects that require a specific set of skills, planning and resources to ensure success.
Starting an alternative fund demands an in-depth understanding of the legal, tax and compliance framework of the chosen jurisdiction(s), as well as establishing a robust foundation for regulatory adherence. Scaling a fund focuses on operational efficiency, advanced regulatory reporting, and managing expanding teams and service provider networks. Both starting and scaling sit within the envelope of investor expectations (including in respect of fees
and liquidity). Anything other than a “tried and trusted” fund location may not be palatable. While new jurisdictions will state their case, experienced fund managers (and their IR teams) will know all too well that time spent talking about structure is time better spent talking about strategy.
Key challenges: starting and scaling up
When starting a fund the initial focus will be on selecting the appropriate jurisdiction, considering key factors such as regulation, location of investors and tax. An understanding of local tax implications, including VAT, capital gains tax and any double taxation treaties, may (subject to strategy) be critical, as missteps in this area can lead, for example, to tax liabilities arising long after interests in the fund have been valued.
Raising capital to start a fund can be challenging. The difficulty correlates, to an extent, with the portfolio manager’s track record and/or perceived pedigree. In terms of the former, and while investors have demonstrated a willingness to back those with a record of fewer than twelve months1, those with good performance history will be well-advised to check that their employment or partnership terms allow its use. Often track record belongs to the former business.
Meeting investor demands while maintaining efficiency can also be daunting during the start-up phase. Recently, the allocation preferences of established managers as part of their collateral management programme and fee pressures have led to start-up managers running separate accounts or funds of one over pooled investment vehicles.
Tackling start-up considerations requires early collaboration with tax and legal advisors and selecting responsive outsourced service providers from the outset. Establishing a solid operational structure, including adherence to jurisdictional requirements, is crucial to ensure long-term success.
Scaling a fund requires a shift towards greater operational efficiency and expansion, including the ability to manage increasingly complex regulatory reporting. As funds grow, they should consider their outsourced provision to maintain consistency, focus and internal headcount. Additionally, a greater attention to talent management is essential, particularly as funds expand operations to new jurisdictions or face competitors who have done so.
As already noted, the complexity of regulatory reporting intensifies as funds scale, with more frequent and detailed data requirements. To address these challenges, funds (and/or their outsourced service providers) must invest in robust technology solutions for regulatory compliance and data management.
In summary
Navigating the journey from starting to scaling requires careful planning, a deep understanding of the regulatory landscape and a strategic approach to operational management.
While not wanting to overengineer at start-up or set an unrealistic break-even AUM in light of downward fee pressures, managers will want to make choices (including outsourced provider selection) that can grow with them and are in line with the business they aspire to be. Managers will want to run a lean operating model, outsourcing where attractive to do so, to help attract investor interest.
Both starting and scaling will require strong performance and the strategy to be in vogue with investors.
Jon Hanifan, Business Development Director, Centralis Group
Well known in the alternative asset management industry, Jon has over 20 years of UK tax and commercial experience gained across senior roles within the Big 4, industry, legal practice and the outsourcing industry. Jon has successfully advised, and lead, businesses at various stages in their respective lifecycle. Now based in New York, Jon has also previously acted as a UK director, including of industry charity Help For Children (UK) (previously Hedge Funds Care (UK)).
1 As cited in the September 2024 report by AIMA in partnership with Marex Prime Services: How are emerging hedge fund managers attracting capital and keeping their edge.
This article was originally published in the November addition of the Alternative Investment Journal which you can view here.